Taxation Depreciation Reports

2017 Budget updateThe government has announced major changes affecting depreciation for residential properties purchased after 7:30pm AEST 9th May 2017. The treasury Law Amendment (Housing Tax Integrity) Bill 2017 is currently being debated in Parliament. We will update our website once the Bill has been passed and the final details are known.

If you purchased your property after this date please phone us on 1800 808 991 talk to our senior tax agent for the latest advice. If you purchased your property prior to 9th May 2017, you will not be effected by the changes.

It is no idle claim to say the name Leary and Partners has become synonymous with the preparation of taxation depreciation schedules for strata title buildings. However, we also do schedules for other types of property – from retirement villages and major industrial complexes to farm sheds and everything in between.

Most large accountancy firms and many small and medium sized firms throughout Australia have clients who have received schedules prepared by the company.

Company associate, Ms Kaylene Arkcoll, heads the taxation consulting division. Kaylene is a registered tax agent who holds a Master of Applied Law (Taxation Law). She specialises in property tax related research and is responsible for the company’s information support services, including an Accountant’s Newsletter received by nearly 9,000 accountants across Australia.

I Own a Property, Can I Claim a Tax Deduction?

To qualify for a tax deduction your property needs to be income producing.

This normally means the property must either be rented or used as the setting for your business. Almost all properties that meet this requirement will be eligible for some form of depreciable claim. The important questions are “What type of claim am I making?” and “For how much?”.

There are two types of ‘depreciation’ deduction that may apply to your property. Both types of deduction have their own special qualification requirements and calculation methods.

Deduction Type 1: Division 43 Building Allowance

The Division 43 building allowance is an annual deduction based on a set percentage of the building’s original construction cost. The percentage varies between 2.5% and 4.0% depending on when construction commenced and for what the building is used.

Residential Properties If construction of your residential property commenced after 15 September 1987 it will qualify for the Division 43 construction allowance.

(For residential properties commenced between 18 July 1985 and 14 September 1987 the deduction rate was 4%. However this deduction had a 25 year life from when the property was first used. The Division 43 deduction on these properties has usually either finished or is very close to finishing.)

Commercial Properties (any property not used for residential purposes) If construction of your commercial property commenced after 19th July 1982, it will qualify for the Division 43 construction allowance.

(For commercial properties commenced between 22 August 1984 and 15 September 1987 the deduction rate was 4%. However this deduction had a 25 year life from when the property was first used. The Division 43 deduction on these properties has usually either finished or is very close to finishing.)

Structural Improvements to Land Originally, Division 43 deductions were limited to structures that would generically be described as ‘buildings’. Since 27 February 1992 you can also claim a deduction for built structures such as roads, driveways, paths, retaining walls, fences, swimming pools, clothes lines, etc., (but not for soft landscaping such as gardens and lawns).

Alterations or Additions to the Original Building Structural changes or additions to a building after it was constructed are treated as “mini-building projects” and qualify for the Division 43 deduction based on the rate and cost at the time they were done. This means that there may be a smaller Division 43 deduction for your property even if the original construction is too old to qualify. Typical “mini-building projects” include adding a deck, patio or carport, refurbishing bathrooms, replacing kitchen cupboards, tiling floors or adding security screens.

At certain periods of time, higher Division 43 rates have applied to specialist categories of building (such as short-term traveller accommodation and manufacturing buildings). Special qualification requirements mean these deductions are not available to most taxpayers.

Deduction type 2: Division 40 Depreciation

The Division 40 depreciation system is basically the same for residential and commercial properties, although different items may be eligible for depreciation and the depreciation rates may vary.

In a simple residential property, Division 40 deductions can be claimed on items such as: carpet, cooktops, wall ovens, dishwashers, rangehoods, hot water units, air conditioning units, smoke detectors and curtains and blinds. (Each property needs to be individually checked to identify all its eligible items.)

You will qualify for a Division 40 depreciation claim on these items regardless of how old the building is or how previous owners used the property. This means that there will be a Division 40 claim for most properties.

Because the Division 40 deduction associated with a property depends on the number, type and condition of the depreciable items, the claim available to you can vary substantially between otherwise similar properties.

For example, a four-year-old house with extensive carpeting and air conditioning may have a higher claim than a house that has just been refurbished with polished timber floors and no air conditioning. Conversely, if the items in the first house are eight or nine years old, this will be reflected in their market value and result in a comparatively low claim.

If your property does not qualify for a Division 43 deduction and you are not sure whether the Division 40 furniture and equipment will justify commissioning a depreciation schedule, call us and ask.

Want to know more about making a claim?

If you qualify for one or both of these deductions, you can start claiming them as a tax deduction from the date the property was made available for rental or occupied by yourself for income producing purposes.

If your initial use of the property was not income producing, the depreciation calculations start from when you first used the property – but you cannot make a tax claim for this period. For example, the house’s carpet depreciates in value from when you bought it but you cannot claim a tax deduction during the three years when you lived in the house yourself.

Division 43

To claim the Division 43 deduction for your building you need to know:

The dates on which construction of your property commenced and finished.

The building’s original construction cost in the format required by the Australian Tax Office (ATO), as explained in Tax Ruling TR 97/25.

TR 97/25 says that Division 43 claims must be based on the original builder’s or developer’s cost to construct the property. The cost must exclude land price, site clearance and preparation costs, bulk excavation, soft landscaping, developer’s profit and marketing and legal transfer fees. For buildings constructed before 27th February 1992, external structural elements (fences, roads, paving, etc.) must also be excluded.

If you contracted to have the property constructed for you, or added/changed building elements after acquiring the property, you must base your claim for these works on your own cost records. Except in a limited number of circumstances, we cannot prepare a claim based on our own independent cost estimate. We can however assist you to collate your costs and prepare estimates for individual Division 40 items that were grouped as part of your total cost.

If you are unable to contact the property’s original builder, or they are unwilling to provide you with this information, please contact us for assistance on 1800 808 991. The ATO will accept our estimate as a quantity surveyor. Estimates prepared by valuers, real estate agents, accountants or solicitors are not acceptable.

Division 40

To claim a Division 40 deduction for your building you need to know the market value of the depreciable items at purchase:

If you purchased the items yourself, the ATO will require your claim to be based on the actual cost from your own cost records. Except in a limited number of circumstances, we cannot prepare a claim based on our own independent cost estimate. We can however include your costs in your depreciation report and apply the correct tax rates to calculate your claim.

If you acquired the items as part of a larger purchase (for example, the carpet and white goods in a house or the loose furniture in a short-term rental unit) you can base your claim on a reasonable estimate of their value at the time you bought them. This estimated value must reflect the age and condition of the individual items when purchased. We can prepare this valuation and calculate the claim for you.

Owners of units in strata titled buildings are entitled to claim the Division 43 building allowance on their share of the strata building’s construction cost. In most states, unit owners are also entitled to depreciate their share of the common plant and equipment (such as lifts, pumps and generators, air conditioning and fire alarm systems). The Australian Tax Office has ruled that the tenants in common can claim income tax deductions for depreciation for their share of jointly owned property (TR 2015/3).

However, you may not be entitled to claim a deduction for certain building works or replacement funishings/equipment if they were paid for by the body corporate/owners corporation using levy funds for which you or other owners have already claimed a tax deduction.

If you would like to discuss a taxation depreciation schedule for your property please call us on freecall 1800 808 991 or email enquiries@leary.com.au.